How George Soros Made the Perfect Speculation

On September 16, 1992, George Soros made over $1 billion in profit in a single day.

It was a legendary trade that would go down in financial history… not unlike the day Nathan Rothschild made a fortune speculating on the Battle of Waterloo in 1815.

Soros did this by making a massive bet against the British pound.

(I expect another opportunity to make enormous profits betting against a major currency very soon. More on this shortly.)

At the time, the pound was tied to the German currency through a fixed exchange rate known as the European Exchange Rate Mechanism (ERM). It was a precursor to the euro currency.

With the ERM, exchange rates between participating European currencies were not set by supply and demand. Instead, governments bought or sold their respective currencies to keep them within acceptable limits.

By 1991, it was clear to everyone that the pound was overvalued at its fixed rate within the ERM. The Bank of England’s ongoing intervention was the only thing propping it up.

Despite that, the market believed the Bank of England could continue the charade indefinitely.

Soros saw things differently. If he could break the Bank of England’s will, it would force them to abandon the pound’s fixed exchange rate… and Soros would make an enormous profit.

Soros planned to do this by shorting the pound. In other words, he’d bet that the pound would weaken.

It was a chance to make the trade of the century.

This is how it worked…

Soros borrowed as many pounds as he could. Then he sold those pounds to the Bank of England for German Deutsche marks at the fixed rate.

If the pound weakened, he could convert his Deutsche marks back into pounds at a much more favorable rate, cover the amount he had borrowed, and pocket the huge difference.

At the same time, his downside was limited because the pound was obviously overvalued. The Bank of England’s willingness to intervene was the only thing holding it up. There was very little chance the pound would strengthen on its own.

It was a low-risk, high-reward play. In many ways it was the perfect speculation.

(Acknowledging Soros’s skill as a speculator is in no way an endorsement of his toxic political views.)

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On the morning of September 15, 1992, Soros’s hedge fund began to massively short the pound…

By the end of the day, the Bank of England had already bought over 600 million pounds in a fruitless effort to defend the currency. But Soros was selling pounds faster than the Bank of England could buy them.

By the next morning, the British government was in a total panic. It raised interest rates from 10% to 12%, hoping to cauterize the wound.

Nick is Doug Casey's globetrotting companion and is the Senior Editor of Casey Research's International Man. He writes about economics, offshore banking, second passports, value investing in crisis markets, geopolitics, and surviving a financial collapse, among other topics. He is a CFA charterholder. In short, Nick's work helps people make the most of their personal freedom and financial opportunity around the world. To get his free video crash course, click here.